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What Amazon’s Whole Foods deal means for Supermarkets

When Amazon moves into your area of business, that’s rarely good news for anyone but Amazon and is certainly a cause for concern for you. That’s the situation British supermarket giants like Tesco and Sainsbury’s are potentially facing since Amazon’s purchase of Whole Foods in August.

What it means for the supermarket industry in this country remains unclear for now, but for Whole Foods the impact was immediate with a price cut of up to 40% on items taking place as soon as the deal was announced. Another very visible sign of the times was that some stores began stocking Amazon Echo smart speakers, even going as far as labelling them as their ‘pick of the season’.

But what will the long term impact be for supermarkets?

Why has Amazon bought Whole Foods?

A £10.7bn takeover of a relatively niche chain of supermarkets seems like a costly way for Amazon to dip its toes into a hugely competitive market, particularly in the UK where there are just nine Whole Foods stores in the country, most of which are in London. The company had initially targeted opening 40 stores, but found itself in financial trouble almost immediately, with one store in Glasgow about as far as the expansion got.

But still, its growth in America from a single Texan health food store that opened in 1978 has been remarkable, demonstrating the potential appeal for upscale grocery stores as an alternative to traditional supermarkets. ‘Upscale’ of course means ‘expensive’, particularly given the quality and purity of the food being sold, which limits its mass appeal when supermarkets traditionally try to sell as cheaply as possible.

This is what makes Amazon’s purchase of Whole Foods all the more interesting. The online giant isn’t known as a premium retailer, and has focused on providing things faster and more cheaply than its offline and online rivals: more like a Tesco than a Waitrose, to use an analogy from the British supermarket industry. So it’s no surprise that its first action at Whole Foods was to slash prices.

Whether that is a sustainable business model in the health food market remains to be seen, as does whether Amazon wants to continue targeting that audience or use Whole Foods as a gateway to the grocery market in general. Certainly loyal Whole Foods shoppers will be quick to identify any shortcuts being taken when it comes to sourcing the food on sale there in the name of price-cutting.

What can Amazon bring to the grocery market?

When Amazon started selling books online in 1995, it began to change the way we shop and led to the decline and collapse of several large offline rivals, with only Barnes & Noble weathering the storm. Worth noting from those early years is Amazon’s patience when it came to making a profit (something it did not achieve until 2001) and its slow and steady approach to growth in those days helped it survive the dotcom bubble bursting to come out the other side ready for world domination.

This may explain the immediate price cuts at Whole Foods, as Amazon is prepared to take a hit in the amount of money made at those stores so that it can start to get a foothold and expand its audience in the grocery market. It isn’t trying to take over from supermarkets this year, it’s trying to again change the way we shop over the next few decades.

This is why those price cuts will be worrying the supermarket giants, with Mark Baum, senior vice president at the Food Marketing Institute pointing out: “Price was the largest barrier to Whole Foods’ customers. Amazon has demonstrated that it is willing to invest to dominate the categories that it decides to compete in. Food retailers of all sizes need to look really hard at their pricing strategies, and maybe find some funding sources to build a war chest.”

Placing its Echo and Echo Dot products amongst the organic fruit and vegetables at Whole Foods also shows Amazon’s long-term ambition of using its technology to help us do all of our shopping from the convenience of our own kitchens. From Amazon, of course. Whole Foods stores will have Amazon Lockers to allow pick-up points for products ordered online, and its Prime membership scheme will find its place at the check-outs.

Conclusion

For the immediate future, the impact of Amazon’s entry to the supermarket battle won’t really be felt in the UK, as there are so few Whole Foods stores. But you can bet that there will be plans afoot to change that over the next few years, particularly if the venture proves to be successful across the Atlantic, so the current giants of the grocery marketplace will be watching warily. They will know that when Amazon sets its sights on something, so far it has rarely failed to achieve domination, and this move into groceries forms only a part of its ambition to monopolise the retail world in general.

What do you think of Amazon’s purchase of Whole Foods and the potential impact it will have on supermarkets? Tweet us @mporiumgroup to let us know your thoughts.

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